- 5.17.14 Fraudulent Transfers and Transferee and Other Third Party Liability
- 18.104.22.168 Third Party Liability Overview
- 22.214.171.124.1 Transferee Liability
- 126.96.36.199.2 Fiduciary Liability
- 188.8.131.52.3 Successor Liability
- 184.108.40.206.4 Nominee or Alter Ego Doctrines
- 220.127.116.11 Transferee Liability
- 18.104.22.168.1 Types of Transfers
- 22.214.171.124.2 Secondary Liability
- 126.96.36.199.3 Establishing Transferee Liability
- 188.8.131.52.3.1 Transferee Liability Directly Imposed on the Transferee ("At Law")
- 184.108.40.206.3.2 Transferee Liability Based on Fraudulent Transfers ("In Equity")
- 220.127.116.11.3.2.1 Fraudulent Transfers Under Federal and State Law
- 18.104.22.168.3.2.2 Types of Fraud in a Fraudulent Transfer
- 22.214.171.124.3.2.3 Subsequent Transfers
- 126.96.36.199.3.3 Trust Fund Doctrine
- 188.8.131.52.3.4 Successor Liability of a Corporation as a Transferee
- 184.108.40.206.3.5 Transferee Liability of a Shareholder or Distributee of a Corporation
- 220.127.116.11.4 Extent of Transferee Liability
- 18.104.22.168 Fiduciary Liability
- 22.214.171.124 Methods of Collecting from a Transferee or Fiduciary
- 126.96.36.199.1 Assessing Transferee and Fiduciary Liability
- 188.8.131.52.2 Assessing Liability Under IRC 6901
- 184.108.40.206.3 Burden of Proof Under IRC 6901
- 220.127.116.11.4 Establishing Transferee or Fiduciary Liability by Suit
- 18.104.22.168.5 Defenses to Transferee or Fiduciary Liability
- 22.214.171.124.6 Suit to Set Aside a Fraudulent Transfer
- 126.96.36.199.6.1 Statute of Limitations for a Fraudulent Transfer Suit
- 188.8.131.52.6.2 Defenses for the Transferee in a Fraudulent Transfer Suit
- 184.108.40.206.7 Considerations: Assess Under IRC 6901 or File Suit
- 220.127.116.11 Successor Liability as Primary Liability
- 18.104.22.168 Nominee and Alter Ego Doctrines
- 22.214.171.124.1 Enforcement in Nominee and Alter Ego Situations
Part 5. Collecting Process
Chapter 17. Legal Reference Guide for Revenue Officers
Section 14. Fraudulent Transfers and Transferee and Other Third Party Liability
January 24, 2012
(1) This transmits revised IRM 5.17.14, Legal Reference Guide for Revenue Officers, Fraudulent Transfers and Transferee and Other Third Party Liability.
This section provides guidance on the methods the United States can use to collect an unpaid liability where an initially liable person, e.g., a taxpayer (the "transferor" ), has transferred property to a third party (the "transferee" ) prior to or after the liability to the United States is incurred.
(1) This section has been reorganized in its entirety so that topics flow more logically and redundant provisions have been eliminated. Substantive deletions, additions, or revisions are noted in the following paragraphs.
(2) IRM 126.96.36.199 - added a new overview of the various theories under which the government may collect tax liabilities from a person or entity that is not the original taxpayer.
(3) IRM 188.8.131.52(2) - removed subparagraph (c) in examples of Non-Tax liabilities; example determined to be confusing and inaccurate.
(4) IRM 184.108.40.206.2 - added definition of secondary liability.
(5) IRM 220.127.116.11.3 - added general explanations of transferee liability “at law” and “in equity.”
(6) IRM 18.104.22.168.3(3)(a) and (b) - added explanation that the type of transferee liability resulting from a fraudulent transfer is liability in equity.
(7) IRM 22.214.171.124.3(6) - clarified that while the tax liability arises at the end of the tax year, a transfer occurring during the tax year may give rise to a contingent tax liability at the time of the transfer.
(8) IRM 126.96.36.199.3(9) - added paragraph explaining that different terminology may be used for theories of transferee liability under state law. Questions regarding the appropriate theory or theories that will apply in a given case should be directed to Area Counsel.
(9) IRM 188.8.131.52.3.1(3) - added explanations of state laws which impose liability on a transferee in corporate mergers or consolidations, “de facto mergers,” and corporate dissolutions.
(10) IRM 184.108.40.206.3.3 - discussion regarding use of the “trust fund doctrine” as a basis for establishing transferee liability was expanded; added note explaining the difference between the trust fund doctrine and the direct imposition of liability under IRC § 6672.
(11) IRM 220.127.116.11.3.4 - added language specifically addressing successor liability of a corporation as a transferee.
(12) IRM 18.104.22.168.3.6 - substantially revised to add information and case law citations regarding the extent of a transferee's liability depending upon whether transferee liability is based “in equity” or “at law.”
(13) IRM 22.214.171.124 - added overview of the different methods that may be used to collect from a transferee or fiduciary.
(14) IRM 126.96.36.199.6(7) - added paragraph explaining that a suit to set aside a fraudulent conveyance may be combined with a suit to impose personal liability on a transferee in certain situations.
(15) IRM 188.8.131.52.6.1 - clarified discussion of the applicability of the six-year statute of limitations under the FDCPA; added a note that Area Counsel must be consulted whenever the Service plans to rely on the provisions of the FDCPA to set aside a fraudulent conveyance and the six-year statute is imminent or has expired.
(16) IRM 184.108.40.206.7 - added discussion of considerations for determining whether to follow IRC § 6901 procedures or to file suit.
(17) IRM 220.127.116.11 - added provisions discussing "Successor Liability as Primary Liability."
(18) IRM 18.104.22.168 - expanded discussion of nominee and alter ego doctrines, the distinctions between the two, and enforcement actions that may be taken.
Scott D. Reisher
Director, Collection Policy
There are a variety of situations where a third party can be held liable for the tax liability of another. This IRM discusses the different legal theories for third party liability.
Nominee or alter ego
Although these theories require the application of different laws and different methods for collection, common elements exist in any analysis of third party liability. The legal theory that is pursued by the Service will ultimately depend on the specific facts of a case.
Because the legal theory applied depends on the specific facts, Field Collection will want to fully develop the factual background for each case. This includes, but is not limited to, any information or facts regarding the transfer and the relationship between the parties.
Many of the legal theories for third party liability also involve the assertion of fraud by the Service and, therefore, any evidence or facts suggestive of fraud should also be included when developing the factual background.
This IRM section also discusses the different methods available to the Service for collecting tax liability from a third party. See IRM 22.214.171.124, Methods of Collecting from a Transferee or Fiduciary.
The Service can use administrative remedies where a Notice of Federal Tax Lien was properly filed before a transfer to the third party. In these cases, the federal tax lien can be enforced by lien or levy without first making an assessment against the transferee under IRC § 6901 or filing suit in district court.
The Service can also use administrative collection procedures to collect from a taxpayer’s property that is held by a nominee or alter ego.
Where no federal tax lien attaches to the property before it is transferred to a third party, the Service must generally make an assessment against the transferee using the IRC § 6901 procedures before pursuing administrative collection procedures. In these situations, the Service can also file suit in district court to seek to set aside the fraudulent conveyance.
These methods of collection are all discussed in greater detail in the provisions that follow. A determination of the best approach to take will depend upon the particular facts of the case. After the factual background of a case has been fully developed, Area Counsel is available to assist Field Collection in determining such matters as the applicable state law, or the best legal theory to proceed under given the specific facts. See IRM 126.96.36.199.1, Area Counsel Assistance.
The government may seek to collect a taxpayer’s unpaid tax, penalty or interest by asserting transferee liability when a taxpayer (transferor) has transferred property to another person or entity (transferee) and a substantive provision of the law provides the ability to assert liability against the recipient based on the transfer.
The liability of the transferee is secondary to that of the transferor, meaning it is derived from the transferor’s liability. Transferee liability does not create a new liability. Instead, it provides a secondary method to collect the transferor's tax liability.
Frequently, collection of the tax is based on a finding that the transfer was fraudulent. An actual transfer occurred but there is a legal basis for collecting the tax liability from the transferee.
Transferee liability may also arise under a contract, under federal statutes, or under state law.
A representative of a person or an estate (except a trustee acting under the Bankruptcy Code of Title 11) paying any part of a debt of the person or estate before paying a debt due to the United States is personally liable to the extent of the payment for unpaid claims of the United States.
A fiduciary is not liable unless the fiduciary knows of the debt or had information that would put the fiduciary on notice that an obligation was owed to the United States.
Fiduciary liability is discussed more fully in IRM 188.8.131.52, Personal Liability of the Fiduciary.
Under the successor liability doctrine, the government seeks to impose liability because the taxpayer sold or transferred assets to or merged with another corporation and the recipient or surviving corporation is liable under state law for the debts of the predecessor corporation.
The successor corporation may be liable as a transferee, as more fully discussed in IRM 184.108.40.206.3.4, or the successor corporation may be primarily liable, as more fully explained in IRM 220.127.116.11, Successor Liability as Primary Liability.
Nominee or Alter Ego. The government may collect a taxpayer’s liability from the assets of a third party if the third party is holding assets as the taxpayer’s nominee or alter ego.
The nominee theory is based on the premise that the taxpayer ultimately retains the benefit, use, or control over property that was allegedly transferred to a third party. Thus, the nominee theory focuses on the relationship between the taxpayer and the transferred property. A transfer of legal title may or may not have occurred, but the government does not believe a substantive transfer of control over the property in fact occurred.
The alter ego theory allows collection from the taxpayer’s alter ego when the taxpayer and the alter ego are so intermixed that their affairs are not readily separable. Thus, the alter ego theory focuses on the relationship between the taxpayer and the alter ego.
As explained in IRM 18.104.22.168, Nominees and Alter Ego Doctrines, the nominee and alter ego doctrines are separate theories.
Transferee liability is a method of collecting an unpaid liability (tax or non-tax) from the property recipient where a transferor has transferred property to a third party (the transferee) prior to or after a liability is incurred (such as the assessment of a tax).
The following are examples of underlying debt for which a transferee proceeding can be brought. The list is not exhaustive, but is intended to indicate the range of underlying liabilities, particularly non-tax.
A tax liability for which a deficiency notice was issued to the taxpayer and that is assessed against the taxpayer, or that is set forth in a judgment against the taxpayer.
A liability for a tax not subject to the deficiency procedures that is assessed against the taxpayer, or that is set forth in a judgment against the taxpayer.
A tax liability for which a deficiency notice could have been issued to the taxpayer, or a judgment obtained against the taxpayer, but for which, instead, a notice of deficiency is issued to a transferee or fiduciary, or a judgment obtained against the transferee or fiduciary.
An erroneous refund or credit, where the amount owed is determined in a judgment against the recipient-transferor.
Government property (for example, trust funds or the employer's portion of employment tax liabilities received by a professional employee organization (PEO) from a common law employer which is diverted to a person related to the PEO, where the amount is determined in a judgment against the PEO).
A transfer can be direct or indirect and includes:
The disposition of or parting with an asset or an interest in an asset.
The payment of money.
The payoff of debt.
The release of a debt or claim.
The granting of a lease.
The creation of a lien or other encumbrance.
The compensation, especially when excessive, paid to corporate officers.
The distribution of sale proceeds or other corporate assets to shareholders.
Courts generally consider a transferee’s liability to be secondary to the primary liability of the transferor. Secondary liability means the transferee derives its liability from the transferor’s liability based on the receipt of property under circumstances which subjects the transferee to the liabilities of the transferor.
Before pursuing a transferee, the Service must generally exhaust all legal remedies it may have against the transferor for collection of the tax. The general rule is that the Service must show that collection remedies against the transferor have been exhausted or would be futile. See Gumm v. Commissioner, 93 T.C. 475, 480 (1989). The extent to which the Service must proceed against the transferor depends on the facts and circumstances. For example, the Service need not pursue a corporate taxpayer that has been stripped of its assets or a trust that has distributed its property to a beneficiary and terminated.
A transferee is liable for a tax either "at law" or "in equity."
"At law" liability is where the liability of the transferee is directly imposed by federal or state law or agreed to as part of a contract (either an express or implied agreement).
"In equity" liability is where the liability of the transferee is imposed by a court based on equity or fairness principles.
Transferee liability in equity is based on fraudulent conveyance laws that were initially developed by courts based on the principle that debtors may not transfer assets for less than adequate consideration if they are left unable to pay their liabilities.
Although the doctrine was initially based on the common law (case law), both federal and state statutes now address setting aside transfers based on a fraudulent conveyance.
To establish a transferee’s liability “at law,” the Service must prove:
the transferor transferred property to the transferee;
the transferor was liable for the tax at the time of the transfer, or the transfer occurred in the year of liability, and the transferor remains liable for the tax; and one of the following:
the transferor and the transferee entered into a contract in which the transferee expressly or impliedly agreed to assume the transferor’s tax liability, or
liability is directly imposed on the transferee (strict liability) under a federal or state statute (e.g., a bulk sales law or a state corporate merger or dissolution statute) or case law.
While not a required element for establishing transferee liability at law, information regarding the value of the property at the time of transfer should be provided because applicable law may limit the transferee's liability to this amount. Additionally, information regarding efforts made to collect the tax from the transferor, or why collection actions against the transferor would be futile, should be provided.
To establish a transferee’s liability "in equity," the Service generally must prove:
the transferor transferred property to the transferee;
the transferor was liable for the tax at the time of the transfer, or the transfer occurred in the year of liability, and the transferor remains liable for the tax;
the value of the transferred property at the time of transfer (which generally determines the limits of the transferee's liability);
the transfer was for less than adequate consideration;
the transferor was insolvent or the transfer made the transferor insolvent; and
all reasonable efforts have been made to collect the liability from the transferor-taxpayer.
The tax liability arises at the end of the tax year. However, a transfer occuring during the tax year may give rise to a contingent tax liability at the time of the transfer.
For certain kinds of transfers (e.g., fraudulent transfers, gifts and testamentary distributions), the Service must also prove the value of the transferred property at the time of the transfer, which generally determines the limits of the transferee liability. See IRM 22.214.171.124.4, Extent of Transferee Liability.
The methods of establishing transferee liability, discussed below, are not mutually exclusive. Frequently, the facts in a particular case may support a number of different theories for imposing transferee liability. For example, depending upon applicable state law, the same set of facts could support imposing liability on the transferee under the following theories:
trust fund doctrine
transfer to shareholder or corporate distributee
Additionally, states may use different terminology for these different theories. For example, not all states specifically recognize the doctrine of "successor liability" but instead will impose transferee liability under the same or a similar set of facts and call it something else (e.g., trust fund doctrine, fraudulent conveyance). For Field Collection, fully developing the facts of the case that support varying theories of transferee liability is more important than determining which specific legal theory applies. Consult with Area Counsel to determine the appropriate legal theory or theories under which suit may be brought in your state.
Many of the State Law Guides on the My SB/SE Counsel website include a discussion of applicable state law for fraudulent conveyances or other types of transferee liability. See http://ccintranet.prod.irscounsel.treas.gov/OrgStrat/Offices/sbse/Pages/LawGuides.aspx.
A transferee liability is considered "at law" when it is directly imposed by a federal or state law specifying that in a particular situation a transferee will be liable for the debts of the transferor. The transferee liability my be directly imposed by a statute or by judicially created doctrine embodied in case law.
When transferee liability is based on the fraudulent transfer of property, the transferee liability is "in equity" even though a state statute provides the mechanism to set aside the fraudulent conveyance. In these scenarios, the fraudulent transfer statute sets forth criteria to be considered by a court to determine if a fraudulent transfer took place, and authorizes the court (a) to enter a judgment of liability against the transferee, and/or (b) to set aside the fraudulent transfer. See IRM 126.96.36.199.3.2.
The Internal Revenue Code has provisions which impose direct liability on a transferee for the transferor's tax.
A distributee/recipient of certain types of property from a decedent’s estate is personally liable under IRC § 6324(a)(2) for estate taxes to the extent of the value of the property received. See IRM 188.8.131.52.1(4), The Estate Tax Lien.
A donee of a gift is personally liable under IRC § 6324(b) for any gift tax incurred by the donor to the extent of the value of the gift. See IRM 184.108.40.206.2(2), The Gift Tax Lien.
In the situations listed above in (a) and (b), no assessment against the transferee or fiduciary is needed to collect during the 10 year lien period provided by IRC § 6324 with respect to the lien that arises automatically without assessment. A judgment or assessment may be needed after expiration of the 10 year lien period.
Most states also have statutes which directly impose liability on a transferee in certain circumstances.
Bulk sale provisions found in the Uniform Commercial Code (UCC) or other state laws impose liability for a business’ debts on the purchaser of substantially all of the inventory or equipment of the business if notice of the purchase is not given to the business's creditors.
Corporate merger or consolidation - The corporate laws of many states impose liability on the surviving corporation for the debts of the disappearing constituent corporations following a merger or consolidation.
Most states have case law that imposes liability when one corporation sells its assets to another corporation and the asset sale is tantamount to a "de facto merger" or a "mere continuation" of the transferor corporation. See Atlas Tool v. Commissioner, 70 T.C. 86, 113-114 (1978), aff’d, 614 F.2d 860 (3d Cir. 1980).
In these scenarios, the surviving corporation may also have primary liability as a successor in interest. See IRM 220.127.116.11.3.4.
Distributions upon dissolution of corporation: Most states have statutes that authorize creditors to sue shareholders for distributions upon dissolution of the corporate taxpayer. Some states have statutes imposing liability on a director for distributions made upon dissolution of a corporation even if the director is not a shareholder.
Transferee liability may also be directly imposed on a transferee "at law" if the transferee expressly or impliedly agreed to assume the transferor's tax liability in a contract.
Transferee liability in equity may also result from a fraudulent transfer. The concept of transferee liability based on a fraudulent transfer is that fairness dictates that the government should be able to collect from the fraudulently transferred property as if the transferor still held the property.
Although fraudulent transfers take many forms, their common goal is to put assets out of the reach of creditors. It is important to look for a transaction which diminishes a taxpayer’s assets. Any transaction which leaves a taxpayer with something less than what the taxpayer started with can potentially be a fraudulent transfer. For example, the forgiveness by a taxpayer of a debt owed him or the release by a taxpayer of a bona fide claim against a third party constitutes a transfer which may be set aside if the necessary elements of fraud are present.
A transfer is in fraud of a debt owed to a creditor when real or personal property is transferred to a third party with the object or the result of placing the property beyond the reach of the creditor or hindering the creditor’s ability to collect a valid debt.
Many theories of liability require a party seeking to set aside a transfer of property as fraudulent to exhaust all other available remedies against the transferor. See Gumm v. Commissioner, 93 T.C. 475, 480 (1989). The general rule is that the Service must show that collection remedies against the transferor have been exhausted or would be futile. This means that the Service should always make a reasonable and well-documented search for additional assets retained by the transferor, and first attempt to satisfy the debt out of those assets.
When fraudulent transfers are identified, it may be advisable to file a specially worded Notice of Federal Tax Lien identifying the transferee and specific property involved to prevent further clouding of title while enforcement actions are being taken. Approval of and guidance as to the styling of such specially worded notices of lien must be secured from Area Counsel before recording. See IRM 18.104.22.168.4.1, Preparing Special Condition NFTLs (Nominee, Alter-Ego, and Transferee).
Depending on the facts of the case and the applicable state law, transferee liability based on fraudulent transfer may overlap with liability imposed under the trust fund doctrine (IRM 22.214.171.124.3.3), successor liability (IRM 126.96.36.199.3.4), and the liability of shareholder and corporate distributees (IRM 188.8.131.52.3.5).
The Federal Debt Collection Procedures Act (FDCPA) became effective in 1991. 28 USC § 3001 et seq. Prior to the FDCPA, the United States relied on applicable creditor and debtor law of the various states to attack fraudulent transfers.
The FDCPA gives the United States a uniform federal procedure for setting aside a fraudulent transfer to aid in the collection of federal debts, including tax debts. 28 USC § 3301 et seq. These sections of the FDCPA are based on the Uniform Fraudulent Transfers Act, 7A Pt. II Uniform Laws Annotated (ULA) 2.
The United States is not bound to use the FDCPA to collect its debts. If necessary, it can proceed under any cause of action provided by state or federal law. See United States v. Letscher, 99-2 USTC ¶ 50,947 (S.D.N.Y. 1999).
All states recognize a cause of action to set aside a fraudulent transfer. A majority of jurisdictions have adopted either the Uniform Fraudulent Conveyance Act (UFCA), 7A Pt. II ULA 246 (2 states & U.S. Virgin Islands) or its successor, the Uniform Fraudulent Transfer Act (UFTA), 7A Pt. II ULA 2 (43 states and the District of Columbia). The fraudulent transfer provisions found in the UFTA are similar to those in the FDCPA.
It is important to review the law of the state in which the transfer occurred. Many of the State Law Guides on the My SB/SE Counsel website include a discussion of applicable state law for fraudulent conveyances or other types of transferee liability. See http://ccintranet.prod.irscounsel.treas.gov/OrgStrat/Offices/sbse/Pages/LawGuides.aspx.
The FDCPA, the UFCA and the UFTA recognize both actual fraud and constructive fraud as grounds for setting aside a transfer.
Constructive fraud and actual fraud are the two principal kinds of fraud. At least one of them must be proven to set aside a transfer.
Proof of constructive fraud is sufficient to set aside a transfer that occurs after the debt arises. FDCPA § 3304(a); UFTA § 5; UFCA §§ 4 and 5.
Proof of actual fraud will defeat a transfer whether the debt arises before or after the transfer. FDCPA § 3304(b); UFTA § 4; UFCA §§ 6 and 7.
Constructive fraud exists when property is transferred for inadequate consideration (or for less than the reasonably equivalent value) and the transferor either is insolvent when the transfer occurs or is made insolvent by the transfer. FDCPA § 3304(a); UFTA §§ 4(a)(2) and 5; UFCA §§ 6 and 7. A transferor’s intent is immaterial if constructive fraud is proven. See IRM 184.108.40.206.220.127.116.11 .
Actual fraud occurs when property is transferred with the actual intent to hinder, delay, or defraud a creditor in the collection of a debt owed it. FDCPA § 3304(b); UFTA § 4(a)(1).
It can be difficult to prove that a transfer was made with the actual intent to defraud a creditor. A fraudulent transfer usually is made without any verbal or written expression of the reason for the transfer.
Because of this, actual fraud is generally proved through circumstantial evidence known as the "indicators of fraud," such as lack of adequate consideration or a transfer to insiders. For other indicators of fraud, see IRM 18.104.22.168.22.214.171.124(3), below.
The fact that a taxpayer is in debt does not preclude the taxpayer from transferring property for adequate consideration. A transfer founded on adequate consideration and made with a bona fide intent is valid against the United States. But see the discussions of preferential transfers in IRM 126.96.36.199.188.8.131.52(6) and the trust fund doctrine in IRM 184.108.40.206.3.3, below.
The United States may prove constructive fraud to set aside a transfer that occurs after the debt arises.
Constructive fraud exists when a transferor does not receive reasonably equivalent value (FDCPA & UFTA) or fair consideration (UFCA) in exchange for the transfer, and the transferor was insolvent at the time of the transfer or became insolvent as a result of the transfer.
Reasonably equivalent value is not defined by the FDCPA or the UFTA except that a purchaser at a regularly conducted non-collusive foreclosure sale is presumed to give reasonably equivalent value. FDCPA § 3303(b); UFTA § 3(b). The concept of reasonably equivalent value does not exist under the UFCA; instead, the concept of fair consideration is used.
Fair consideration for purposes of the UFCA is given in exchange for property if:
it is a “fair equivalent” to the property conveyed; and
exchanged in good faith. UFCA § 3.
A transferor is insolvent if the sum of the transferor’s debts exceeds a fair valuation (FDCPA & UFTA) or the fair salable value (UFCA) of the transferor’s assets. FDCPA § 3302; UFTA § 2; UFCA § 2.
The FDCPA and the UFTA presume that a transferor who generally is not paying debts as they come due is insolvent.
Where insolvency results from a series of related transfers, some of which may have occurred before actual insolvency, all of the transfers can be set aside as fraudulent.
The FDCPA and the UFTA contain another category of transfers which are considered fraudulent as to a current creditor. A transfer is fraudulent if:
the transfer was made to an insider on account of an antecedent (prior) debt;
the transferor was insolvent at the time; and
the insider had reason to believe that the transferor was insolvent when the transfer occurred.
This is commonly known as a preferential transfer to an insider. FDCPA § 3304(a)(2); UFTA § 5(b). Examples of insiders include:
family members, when the transferor is an individual
directors and officers, when the transferor is a corporation
general partners and relatives of general partners, when the transferor is a partnership. FDCPA § 3301(5); UFTA § 1(7).
Proof of actual fraud as to a debt owed to the United States is sufficient under the FDCPA, the UFCA and the UFTA to set aside a transfer whether the debt arises before or after the transfer. FDCPA § 3301(5); UFCA § 7; UFTA § 4(a)(1).
Actual fraud exists when a transferor actually intended to hinder, delay or defraud a creditor. Because it can be difficult to prove that a transfer was made with the actual intent to defraud creditors, use of circumstantial evidence, "indicators of fraud," is often necessary.
A transferor’s actual intent is generally proved through the indicators of fraud. The commonly recognized indicators of fraud include:
the transfer lacks fair consideration;
the transferor and transferee are closely related, such as family members, or a shareholder and the shareholder’s closely held corporation;
the transferor retains the enjoyment, possession and control of the property after its transfer;
the transfer was concealed;
before the transfer, the transferor had been sued or was threatened with suit;
substantially all of the transferor’s assets were transferred;
the transferor left the jurisdiction secretly;
the transferor removed or concealed assets;
the transferor was insolvent at the time of transfer or became insolvent shortly after the transfer occurred;
the transfer occurred shortly before or after a substantial debt was incurred; or
the transferor transferred the essential assets of a business to the holder of a lien who subsequently transferred the assets to an insider. See FDCPA § 3304(b)(2); UFTA § 4(b).
The adequacy of the consideration for the transfer is an important indicator of fraud. United States v. Green, 201 F.3d 251 (3d Cir. 2000); United States v. Denlinger, 982 F.2d 233 (7th Cir. 1992).
A person cannot give property away if it is to the detriment of creditors. If some consideration has changed hands, it may be necessary to determine whether the consideration was merely a "cover" for a fraudulent transfer.
Although the possibility exists of proving that a transfer was fraudulent even if consideration changed hands, the presence of adequate consideration is a strong defense.
A transfer of all or nearly all of a taxpayer’s property which leaves the taxpayer without any means of paying creditors is highly indicative of fraud. It must be determined, however, whether this property was transferred in an attempt to pay the transferor’s debts. If so, there may be no basis to invalidate the transfer without showing that the United States had legal priority over the creditors who were paid.
A transfer made shortly before or after the tax is due may be evidence of fraud. United States v. Scherping, 187 F.3d 796 (8th Cir. 1999); United States v. Parks, 91-1 USTC ¶ 50,263 (D. Utah 1991).
In attempting to set aside a transfer, it is helpful to show that the transaction was not made in the usual course of business. Examples of this are:
a sale made outside of usual business hours;
a failure to record an instrument that would normally be recorded;
an extension of credit for an unusually long period of time to a purchaser without security; and
a failure by the transferee to properly inventory goods transferred to him.
A reservation of an interest in the transferred property that is inconsistent with a bona fide transfer indicates fraud.
The FDCPA, the UFTA and the UFCA also consider a transfer of property without receipt of reasonably equivalent value (FDCPA and UFTA) or fair consideration (UFCA) to be fraudulent, whether the debt arises before or after the transfer, if the transferor:
was engaged in or was about to engage in a business or a transaction for which the remaining assets of the transferor were unreasonably small in relation to the business or transaction, or
intends or believes that he will incur debts beyond his ability to pay as they mature. FDCPA § 3304(b)(1)(B); UFCA §§ 5 & 6; UFTA § 4(a)(2).
A good-faith purchaser from a transferee of the transferred property generally takes the property free of the initial transferor’s fraud. The same holds true for a creditor who in good faith extends a loan to the transferee and takes a security interest in the transferred property.
A subsequent transferee with notice of the fraudulent transfer is subject to the rights of creditors of the initial transferor.
Transferee liability may also exist based on the trust fund doctrine, a judicially created equitable doctrine. The theory behind the doctrine is that when a transfer leaves the transferor without enough assets to pay debts, the transferee holds the transferred property in trust for the benefit of the transferor’s creditors.
Although you should look to the specific requirements under the relevant state case law, the trust fund doctrine generally requires the Service to show that -
the alleged transferee received property of the transferor;
the transfer was made without consideration or for less than adequate consideration;
the transfer was made during or after the period for which the tax liability of the transferor accrued;
the transferor was insolvent prior to or because of the transfer of property or that the transfer of property was one of a series of distributions of property that resulted in the insolvency of the transferor;
all reasonable efforts to collect from the transferor were made and that further collection efforts would be futile; and
the value of the transferred property.
The trust fund doctrine is most commonly used to impose transferee liability on a shareholder for taxes incurred by a corporation when the shareholder receives assets from a corporation prior to its dissolution. See, e.g., Benoit v. Commissioner, 238 F.2d 485, 491 (1st Cir. 1956). Recovery under the doctrine is limited to the value of the property transferred. Many states have also enacted statutes to permit creditors of a corporation to sue shareholders. See IRM 220.127.116.11.3.5, Transferee Liability of a Shareholder or Distributee of a Corporation.
Application of the "trust fund doctrine" as used here should not be confused with the assertion of the "trust fund recovery penalty" under IRC § 6672. IRC § 6672 directly imposes liability on a third party – the person required to collect, truthfully account for, and pay over any tax imposed who willfully fails to do so.
Successor liability may arise under two different scenarios. A successor corporation may be liable as transferee when it is -
a corporation surviving or resulting from a merger, consolidation or reorganization of one or more corporations; or
a corporation to which all or substantially all of the assets of another corporation has been sold or otherwise transferred.
Successor liability may be primary liability if a state statute provides that a corporation surviving or resulting from a merger or consolidation assumes by operation of law all of the liabilities of the constituent corporations. See IRM 18.104.22.168, Successor Liability as Primary Liability, for more information.
State law governing successor liability generally imposes liability in the following circumstances:
when the successor expressly or impliedly assumes the liabilities;
when a corporation reorganizes, merges or consolidates with another corporation;
when one corporation transfers its assets to another corporation but the corporations do not formally merge, there may nevertheless be a de facto merger or the successor may be considered a mere continuation of the corporation selling or transferring assets; or
the transaction amounts to a fraudulent conveyance.
In these instances, the government may rely on successor liability doctrine to hold a successor corporation liable for the tax debts of its predecessor. Given the potential for differences in state law, consultation with Area Counsel is important.
Because whether the successor assumed the transferor's liabilities will generally be a contract interpretation issue, the more difficult instances for the government to establish successor liability are when there is a de facto merger or the seller is a mere continuation. When determining whether a de facto merger or mere continuation exists, courts may look at whether:
the second corporation continues the business or performs the same functions of the taxpayer;
the taxpayer’s employees become the employees of the second corporation;
the taxpayer and the second corporation are owned or controlled by the same individual or individuals;
the successor’s business activities are carried out in the same location;
less than full consideration is paid for the transferred assets; and
the business relationships remain relatively static.
If the surviving corporation may be held liable for the transferor’s debts as a successor under either a statute imposing liability or case law, the transferor’s tax liability may be collected from the successor using the IRC § 6901 procedures. See IRM 22.214.171.124, Successor Liability as Primary Liability, for additional discussion.
Shareholders/distributees who receive assets from a corporate liquidation can be subject to transferee liability for the unpaid corporate income taxes, penalties and interest.
Shareholders who receive assets of a corporation on its dissolution and who are liable as transferees are jointly and severally liable to the extent of the assets transferred to them. The Service is not obligated to pursue all of the shareholders for collection of the corporation’s unpaid income taxes. Since the liability of a shareholder, however, is generally limited to the value of the assets received from the corporation, it may be necessary as a practical matter to pursue all shareholders in order to collect the full liability.
Shareholders/distributees may also be liable as transferees when assets are distributed but the corporation is not liquidated or dissolved. The liability in the following examples would most likely be based on a fraudulent transfer:
A distribution to a shareholder based on the shareholder’s equity interest in a corporation, such as a dividend, or a payment by the corporation of a debt owed to a shareholder, can be a preferential transfer to an insider, thus, resulting in transferee liability. See IRM 126.96.36.199.188.8.131.52 .
If a stockholder is also an officer or an employee of the corporation, and receives a bonus or salary which is unreasonable, the stockholder may be treated as a transferee on the theory that the excessive salary is the equivalent of a distribution of corporate assets.
A corporation or person who acquired the stock or any asset of a corporation may be liable as a transferee.
If the acquisition of assets is a fraud to the creditors of the transferor corporation, the acquiring corporation is liable as a transferee based on a fraudulent transfer. See IRM 184.108.40.206.3.2, Transferee Liability Based on Fraudulent Transfers. A sale or distribution of corporate assets may also result in a trust in favor of creditors under the trust fund doctrine. See IRM 220.127.116.11.3.3, Trust Fund Doctrine.
Transferee liability may arise in a stock or asset sale context, where the sale is in economic substance a "sham." This liability is most likely to be based on a fraudulent transfer. See IRM 18.104.22.168.3.2, Transferee Liability Based on Fraudulent Transfers.
The purchase of the stock of a corporation, followed by the liquidation of the corporation, may render the purchaser liable as a transferee as a successor. See IRM 22.214.171.124.3.4, Successor Liability of a Corporation as Transferee.
Transferee liability may also be a consideration in Notice 2001-16 intermediary transaction tax shelters. These listed transactions are basically intended to avoid the payment of taxes on a corporate stock or asset sale. The participants to the transaction — the seller’s shareholders, the buyer, the intermediary, and the transaction’s facilitators — may all be possible transferees. Their potential liability for unpaid taxes resulting from the transaction will depend on the facts of the case and the proper tax treatment of the transaction. Intermediary transaction tax shelters may also be analyzed under any of the other transferee liability theories listed above, depending on the facts of the case.
The amount of the transferee’s liability for the transferor’s unpaid tax, penalties, and interest depends on whether transferee liability is based "in equity" or "at law."
When transferee liability is based "in equity," the transferee’s liability is generally limited to the value of the property transferred.
For example, liability of shareholders under the trust fund or similar doctrine is limited to the value of property received. Phillips-Jones Corporation v. Parmley, 302 U.S. 233, 237 (1937).
Transferee liability in equity is equal to the value of transferred property at the time of transfer. However, if the value has decreased since the transfer, the liability may be equal to the value of the property at the time the transfer is found to be fraudulent by a court. See United States v. Verduchi, 434 F.3d 17 (1st Cir. 2006).
Generally, transferee liability "at law" is full liability, regardless of the value of the assets received, unless limited by state or federal law or by agreement.
When transferee liability is "at law" because the transferee has agreed to assume the transferor’s liability, the transferee is liable for the full amount of the transferor’s liability, regardless of the value of the assets transferred. Bos Lines, Inc. v. Commissioner, 354 F.2d 830, 837 (8th Cir.1965), aff'g T.C. Memo.1965-71.
Where transferee liability is based on state law, state law determines the extent of liability. Commissioner v. Stern, 37 U.S. 39, 44-45 (1940).
Liability is not limited to the value of the assets transferred if there is a reorganization, merger, consolidation, or the successor corporation is the result of a de facto merger or a mere continuation of the taxpayer. See, e.g., Atlas Tool v. Commissioner, 70 T.C. 86, 113-14 (1978), aff’d, 614 F.2d 860 (3d Cir. 1980).
Shareholder liability is limited to the value of the distribution to the shareholder where a state statute imposes liability upon distribution of assets upon dissolution of a corporation if creditors have not been paid. See, e.g., C.D. Const. Corp. v. Commissioner, 451 F.2d 470 (4th Cir. 1971), aff’g T.C. Memo. 1970-297.
Similarly, a transferee’s liability for gift taxes and estate taxes, based on the Internal Revenue Code, is limited to the value of the gift or the property distributed from the decedent estate. IRC § 6324(a)(2) and (b).
See IRM 126.96.36.199.3 , Establishing Transferee Liability, for further discussion on the distinction between "at law" liability and "in equity" liability.
Each transferee is jointly and severally liable for the transferor’s unpaid taxes to the extent of the value of assets received at the time of transfer. The Service therefore is not required to apportion liability among transferees.
Example: If three transferees each received transfers worth $20,000 and the transferor’s liability is $15,000, then each transferee is liable for the entire $15,000 and not a mere pro rata share ($5,000). The Service may collect the liability from one, two, or all three of the transferees, subject to a total collection of $15,000.
A transferee is liable for interest under IRC § 6601 from the date that the transferee receives notice of transferee liability. Patterson v. Simms, 281 F.2d 577 (5th Cir. 1960).
Generally, a transferee is liable for the transferor's total tax liability, including IRC § 6601 interest that accrues on that tax liability before the transfer, but only to the extent of the value of the assets transferred.
If the value of the assets transferred is less than the transferor's total tax liability on the transfer date, the transferee is not liable for IRC § 6601 interest that continues to accrue on the transferor's tax liability after the transfer date. Estate of Stein v. Commissioner, 37 T.C. 945 (1962). Generally, the transferee's liability for the transferor's tax liability, including interest, is limited to the value of the property transferred to the transferee. The total liability imposed on the transferee may exceed the value of the transferred assets, however, if interest accrues under state law with respect to the assets. See Stansbury v. Commissioner, 102 F.3d 1033 (10th Cir. 1996). In this scenario, the existence, starting date, and rate of interest are controlled by state law.
If the value of the assets transferred is more than the transferor's total tax liability on the transfer date, the transferee is liable for IRC § 6601 interest that continues to accrue on the transferor's tax liability after the transfer date. Lowy v. Commissioner, 35 T.C. 393 (1960). Generally, the total liability imposed on the transferee, including interest, cannot exceed the value of the assets transferred to the transferee. If the excess value of the assets becomes exhausted by the imposition of IRC § 6601 interest, the transferee may be liable for additional interest under state law with respect to the transferred assets.
Regardless of the value of assets transferred, federal law governs the imposition of interest once the notice of transferee liability is issued. A transferee is liable for interest under IRC § 6601 from the date of this notice to the date of payment.
A transferee of the initial transferee may be subject to liability for the tax of the transferor. A transferee of an initial transferee is liable if:
the initial transferee is liable and
there is a basis for transferee liability of the subsequent transferee (such as a fraudulent transfer from the initial transferee).
The liability of a subsequent transferee is generally limited to the value of the property received (see (1) – (9) above).
Remember, however, that a good-faith purchaser from a transferee of the transferred property generally takes the property free of the initial transferor’s fraud. See IRM 188.8.131.52.3.2.3.
Pursuant to 31 USC § 3713(b), a representative of a person or an estate (except a trustee acting under the Bankruptcy Code, Title 11) paying any part of a debt of the person or estate before paying a debt due to the United States is personally liable to the extent of the payment for unpaid claims of the United States. See IRM 184.108.40.206, Elements of 31 USC § 3713(a), for additional discussion.
A fiduciary is not liable unless the fiduciary knows of the debt or had information that would put the fiduciary on notice that an obligation was owed to the United States.
Personal liability under 31 USC § 3713(b) only applies where the United States has priority under 31 USC § 3713(a), the applicable insolvency statute.
The priority generally applies where the person or estate is insolvent.
The priority is superseded by interests that would have priority over the federal tax lien under IRC § 6323.
Personal liability is limited to the value of the assets that the fiduciary distributes in violation of federal priority.
Prior to enactment of IRC § 6901, the United States proceeded against a fiduciary by means of a suit filed in a federal district court. This procedure is still available. See IRM 220.127.116.11.4, Establishing Transferee or Fiduciary Liability by Suit,.
IRC § 6901(a)(1)(B) permits the Service to impose personal liability on a fiduciary under 31 USC § 3713(b) by way of a procedure commenced with the issuance of a notice of fiduciary liability. The fiduciary may then contest the proposed liability in the Tax Court. See IRM 18.104.22.168.2, Assessing Liability under IRC § 6901.
Fiduciary liability is discussed in IRM 22.214.171.124, Personal Liability of the Fiduciary Under 31 USC § 3713(b).
IRC § 6901 Procedures. The government may invoke the procedures under IRC § 6901, which provides a mechanism for collecting the unpaid taxes, penalties and interest from a transferee or fiduciary when a separate substantive legal basis provides for the transferee’s or fiduciary's liability. An assessment under IRC § 6901 allows for collection against any assets held by the transferee or fiduciary.
IRC § 6901 is strictly a procedural statute that does not by itself create any liability. The existence or extent of a transferee's or fiduciary’s liability is determined by applicable state or federal law. The procedures for assessing transferee liability under IRC § 6901 are discussed at IRM 126.96.36.199.1.
District Court Suit. The government may also use judicial enforcement remedies to pursue collection of the tax liability. The government may bring an action in district court against a transferee or fiduciary to impose transferee or fiduciary liability, discussed at IRM 188.8.131.52.4, or a suit to set aside a fraudulent conveyance, discussed at IRM 184.108.40.206.6.
Administrative Remedies. If a Notice of Federal Tax Lien was properly filed before the transfer, then the lien will generally take priority over any subsequent transferees, purchasers, or other interests. See IRC § 6323. If this is the case, the federal tax lien can be enforced by levy/seizure without recourse to the IRC § 6901 procedures or filing suit in federal district court. See IRM 220.127.116.11.1(5).
If legal title to property has been transferred by the transferor or fiduciary and no lien attached prior to the transfer, the Service generally may not levy or seize the property without first making an assessment against the transferee under IRC § 6901 or filing suit in district court. This general rule is subject to two exceptions:
The filing of a lien and serving of a levy or seizure may be permissible if the transferor has retained an equitable interest in the property by continuing to assert dominion or control over the transferred property. This is the nominee or alter ego situation, described more fully at IRM 18.104.22.168.
If state law permits the creditors of the transferor to immediately levy or execute against a fraudulent transfer even when it is in the hands of the transferee without first obtaining a judgment setting aside the transfer, the Service should be entitled to levy or seize the transferred property, as well as file a notice of lien against such property. Consult with Area Counsel to determine whether state law permits such action in a particular case.
The following provisions describe how the Service administratively imposes liability for the transferor's tax liability on a transferee or fiduciary. The liability may then be collected from any of the transferee’s or fiduciary’s property. This approach is generally preferable when the value of the property has decreased since the transfer.
To hold a transferee or fiduciary liable for another’s tax, the Service mails a notice of transferee or fiduciary liability to the transferee or fiduciary's last known address. Then if a Tax Court petition is not filed or if the liability is sustained by the Tax Court, the Service can assess the tax against the transferee under the authority of IRC § 6901. See IRM 22.214.171.124.1, Report of Investigation of Transferee Liability, and IRM 126.96.36.199.4, Statutory Notice of Transferee Liability, for more information.
IRC § 6901 provides a procedure by which the Service may assess and collect the unpaid taxes, penalties, and interest:
from a transferee or
from a fiduciary liable under 31 USC § 3713.
IRC § 6901 is strictly a procedural statute; it does not create the substantive liability of a transferee for the transferor’s tax debt. The existence of, or extent of, a transferee’s liability is determined by applicable state or federal law. Commissioner v. Stern, 357 U.S. 39 (1958).
A transferee’s liability may be established at law, e.g., by contract, or under a state or federal law directly imposing liability on the transferee. Liability may also be established in equity, which is based on fraudulent transfer statutes. IRC § 6901(a).
The procedures for establishing transferee and fiduciary liability under IRC § 6901 are similar to the deficiency procedures.
A notice of transferee or fiduciary liability must be mailed to the last known address of the transferee or fiduciary.
The transferee or fiduciary may petition the Tax Court within 90 days.
The liability will be assessed against the transferee or fiduciary if:
• the Tax Court enters a decision against the transferee or fiduciary;
• the transferee or fiduciary defaults on the notice of liability; or
• the transferee or fiduciary agrees to an assessment of the liability.
Once the liability is assessed, and after notice and demand and a refusal to pay, a lien is created which attaches to all property of the transferee or fiduciary. A Notice of Federal Tax Lien must be filed to protect the Service’s interests under IRC § 6323.
The assessment may be collected administratively from all property and rights to property of the transferee or fiduciary.
The period for collection of the assessment against the transferee is the IRC § 6502 collection statute of limitations (10 years running from the assessment against the transferee).
See IRM 188.8.131.52.1, Report of Investigation of Transferee Liability, for procedures for initiating a transferee assessment.
A transferee is defined under IRC § 6901(h) to include a donee, heir, legatee, devisee, and distributee, and with respect to estate taxes, any person who, under IRC § 6324(a)(2), is personally liable for such tax.
The regulations add the following examples to the definition of a transferee: a distributee of an estate of a deceased person, a shareholder of a dissolved corporation, the assignee or donee of an insolvent person, the successor of a corporation, a party to a reorganization as defined in IRC § 368, all other classes of distributees, and with respect to the gift tax, a donee. Treas. Reg. § 301.6901-1(b).
These definitions are not all-inclusive, but are merely examples of transferees.
Assessments against a transferee can be made under IRC § 6901 for a transferor’s:
income tax, estate tax or gift tax; or
other taxes, such as employment taxes, if the transferee’s liability arises out of a liquidation of a partnership or corporation, or a corporate reorganization under IRC § 368(a).
Assessments against a fiduciary can be made under IRC § 6901 for the income tax, estate tax or gift tax due from the estate of a taxpayer, decedent or donor. IRC § 6901(a)(1)(B).
The transferee or fiduciary may be assessed for any of the above-mentioned taxes shown on a return or for any deficiency or underpayment of these taxes. IRC § 6901(b).
The periods of limitations under IRC § 6901(c) for the assessment of the liability of a transferee or fiduciary are:
For an initial transferee, one year after the assessment period against the transferor ends.
For a transferee of a transferee, one year after the period for assessment against the preceding transferee ends, but not more than three years after the period for assessment against the transferor ends.
If, however, before the end of the period for assessment against the transferee, a court proceeding to collect the tax is begun against the transferor or the last preceding transferee, then the period for assessment against the transferee expires one year after the “return of execution” in the court proceeding (when the officer charged with carrying out a judgment returns the order to the court stating the judgment has been executed).
For a fiduciary, one year after the fiduciary liability arises or the period for collection of the tax ends, whichever is the later.
Under IRC § 6901(d), the periods mentioned above may be extended, prior to expiration, by agreement. In the case of a transferee of a transferee, however, the execution of an extension agreement by the initial transferee is not effective to extend the overall three-year limitations period discussed above in paragraph (9)(b) of this subsection.
If a notice of liability has been mailed to a transferee or fiduciary, the running of the statute of limitations for assessment is suspended for the period during which an assessment is prohibited by IRC § 6213 and for 60 days thereafter. IRC § 6901(f).
Where the statute of limitations on assessment with respect to the transferor is open because of the transferor’s tax fraud or his failure to file a tax return, then the statute of limitations remains open as to the transferee. See IRC § 6501(c).
Statutes of limitations for state fraudulent transfer statutes do not apply to IRC § 6901. Bresson v. Commissioner, 111 T.C. 172 (1998).
In a proceeding before the United States Tax Court under IRC § 6901, the burden is on the Service to prove that a transferee or fiduciary is liable for the tax of another. IRC § 6902(a).
A transferor’s deficiency is presumed correct, but a transferee may prove otherwise. A transferee has the burden of proof on this issue, not the Service. IRC § 6902(a). When a court has already decided a transferor’s tax liability, however, a transferee may not relitigate the issue. Jahncke Serv., Inc. v. Commissioner, 20 BTA 837 (1930).
To establish fiduciary liability under 31 USC § 3713(b), the Service has the burden to prove that the fiduciary paid a debt of the person or estate for whom the fiduciary is acting before paying the debts due the United States. The fiduciary is not liable unless the fiduciary knew of the tax debt or had information that would put a reasonably prudent person on notice that an obligation was owed to the United States. United States v. Coppola, 85 F.3d 1015 (2d Cir. 1996).
The United States may establish transferee or fiduciary liability by filing a suit in district court pursuant to IRC § 7402 and 28 USC §§ 1340 and 1345. This suit is brought against the transferee or fiduciary and results in a judgment against the third party, permitting collection from any of the transferee's or fiduciary’s assets.
Since a suit to establish transferee or fiduciary liability is a collection suit, the ten-year statute of limitations in IRC § 6502 for suits to collect taxes applies. The ten-year statute of limitations provided for in IRC § 6324 from the date of death or the date of the gift applies for collection of estate and gift taxes if the suit is based on IRC § 6324 transferee liability.
A suit to establish transferee or fiduciary liability is not limited to certain types of taxes as are the assessment procedures of IRC § 6901. All types of taxes, including employment and excise taxes, can be collected in a transferee suit.
A suit to impose transferee liability may be necessary when the procedures of IRC § 6901 are not available because the statute of limitations for assessment has expired.
A suit to impose transferee liability may be preferable to assessment when:
the transferred property has depreciated in value;
the transferee has concealed, disposed of, or converted the transferred property; or
the transferee has commingled the transferred property with other property.
Where the value of the property has decreased following the transfer, the amount of any personal judgment against the transferee ordinarily cannot exceed the value of the property at the time of the transfer.
Where liability is sought to be imposed on a third-party for another’s tax by way of a suit brought by the United States in a district court, the burden of proof is on the United States as the petitioning party. When a transferee files a refund suit, the burden of proof remains with the transferee.
The government may also bring a suit to collect against the transferred property in the hands of the transferee, also called a suit to set aside a fraudulent transfer. See IRM 184.108.40.206.6, Suit to Set Aside a Fraudulent Transfer.
Proof by the transferee that the transferor’s tax liability has been paid is a valid defense to transferee liability. The transferor’s liability will be collected only once. A transferee’s liability is extinguished once the tax liability is paid by the transferor or other transferee, and either the transferor waives any right to a refund or the period of limitations for seeking a refund has expired. Because a transferee’s liability is secondary to the primary liability of the transferor, a compromise of the transferor’s liability may either reduce or extinguish the liability of the transferee.
Acceptance of an offer to compromise a transferee’s liability has no effect on the transferor’s primary liability or on the liability of other transferees. Any payment by the transferee, though, reduces the transferor’s liability and, thereby, the liability of other transferees.
A transferee may contest the liability of the transferor.
No liability is imposed on the transferee if it is proven that the transferor is not liable for any tax.
A prior decision on the merits of a tax liability of a transferor fixes the amount of the tax for purposes of a transferee’s liability. The transferee is barred from litigating the transferor’s liability, just as the transferor would be barred from relitigating the transferor’s liability in another forum.
To determine whether there is a prior decision on the merits, specific information regarding the resolution of the litigation must be obtained.
A decision on the merits includes a determination by a court following a trial or an agreed stipulation of a tax liability.
A voluntary dismissal prior to entry of a decision by a court or a dismissal for lack of jurisdiction is not considered to be a determination on the merits. In such a case, the transferee can later litigate the transferor’s tax liability in another forum.
A defaulted notice of deficiency is not a decision on the merits.
A closing agreement between a transferor and the Service binds the transferee.
Other defenses include:
the expiration of the statute of limitations;
return of all or a part of the transferred property;
any other defense that can be used for the type of liability asserted (e.g., that the Service has not exhausted its remedies against the transferor).
For defenses of a fiduciary, see IRM 220.127.116.11, Asserting Personal Liability Against a Fiduciary.
Rather than a suit to impose liability on the transferee, the United States may commence a civil lawsuit against the transferor and the transferee in a United States district court when the original taxpayer transferred property in fraud of a tax debt owed to the United States. Ordinarily, the suit requests that the court set aside the transfer. If successful, ownership of the property is reinstated in the transferor, and the transferor’s tax is collected from the property. This approach is generally preferable when the value of the property has increased since the transfer.
The relief requested from the court is:
to set aside the transfer,
to reinstate the transferor’s ownership of the property, and
to order the property sold to pay the transferor’s debt.
The right of the United States to set aside a fraudulent transfer is found in federal law and in state law.
The Federal Debt Collection Procedures Act (FDCPA) provides a federal cause of action for setting aside a fraudulent transfer in a federal district court, other than the United States Tax Court. 28 USC § 3301 et seq.
The United States may also use all of the remedies available to a private creditor under applicable state law to defeat a fraudulent transfer. Generally, the law of the state in which the transfer occurs will govern.
In a suit to obtain relief with respect to a fraudulent transfer, the burden is on the United States to prove that the transfer of the property was in fraud of a debt owed the United States. Depending on the circumstances, the United States must prove that the transfer was the result either of the transferor’s actual fraud or constructive fraud.
Generally, the focus of the cause of action is the transferred property (an "in rem" action). Usually, a personal judgment is not rendered against the transferee. See FDCPA § 3307(b).
Generally, a suit to set aside a fraudulent transfer is combined with a suit to foreclose any liens for the transferor’s taxes which attach to the transferred property once the transferor’s ownership in the property has been reinstated. If a Notice of Federal Tax Lien was properly filed before the transfer, then the lien will encumber the property in the hands of any transferee and normally have priority. See IRC § 6323. Thus, an administrative collection action or a lien foreclosure action can be considered in lieu of a fraudulent transfer suit.
A suit to set aside a fraudulent transfer may also be combined with a suit to impose personal liability on a transferee if the transferred property has depreciated in value. See IRM 18.104.22.168.4. The extent of the personal liability would be the difference between the value of the property when transferred and the value of the property when it is sold by order of the district court.
A fraudulent transfer suit brought by the United States under IRC § 7402(a) to impose transferee liability on a transferee to collect on an assessment against the transferor is subject to the statute of limitations on collection of a tax imposed by IRC § 6502 (ten years after assessment against the transferor, plus applicable extensions). See also FDCPA, 28 USC § 3003(b)(1) (FDCPA does not impose time limits on actions to collect taxes brought under provisions outside the FDCPA).
It is the position of the majority of the courts that the United States is not bound by any state statute of limitations, including the UFTA (generally, four years after transfer). Thus, in a fraudulent transfer suit brought by the United States pursuant to IRC § 7402(a) and a state statute, the limitations period under IRC § 6502 should control.
Where the United States brings a suit under the fraudulent transfer provisions of the FDCPA, those provisions generally impose a six-year limitations period. See FDCPA, 28 USC § 3306(b). However, the FDCPA also provides that its provisions shall not be construed to curtail or limit the right of the United States under any other Federal law to collect taxes. See FDCPA, 28 USC § 3003(b)(1). Accordingly, an argument could be made that the United States may rely on whichever limitations period is longer, ten years from assessment against the transferor under IRC § 6502, or six years from the fraudulent transfer to the transferee under the FDCPA, 28 USC § 3306(b).
If it is anticipated that the suit will be brought under the fraudulent transfer provisions of the FDCPA and the six year statute of limitations under the FDCPA is imminent or has expired, consult with Area Counsel to determine whether the argument can be made that the ten-year statute of limitations applies in the particular case. To avoid the issue, suits relying upon the FDCPA to set aside a fraudulent transfer should be filed within the six year statute of limitations whenever possible.
A transferee who takes property in good faith and for a reasonably equivalent value is not affected by a transferor’s actual fraud. The transferee’s rights in the transferred property are superior to the transferor’s creditors, and the transfer will not be set aside. FDCPA § 3307(a); UFTA § 8(a).
To be considered a good faith purchaser, the transferee must be without knowledge of the fraudulent purpose of the transferor at the time of the transfer and at the time consideration passes between them.
To qualify as a purchaser for reasonably equivalent value, the transferee must have exchanged property for the transfer. A promise to pay or payment with a nonnegotiable note is not sufficient.
If the transferee is not a good faith purchaser for reasonably equivalent value, then the transferee will be ordered to surrender the property or an equivalent amount of money. The transferee also is subject to an accounting for any rents or profits generated by the transferred property.
Even though a transfer is set aside as fraudulent, a good-faith transferee is allowed a credit for any consideration given to the transferor. The credit may be in the form of a lien on the transferred property or a setoff against any money judgment entered against the transferee. The transferee also will receive a credit for amounts expended to preserve the transferred property.
Another defense available to a transferee is a claim that he has paid other creditors of the transferor to the extent of the value of the transferred property.
The defense of "laches" (which will bar a lawsuit that is filed so unreasonably late that it is unfair to the party sued) does not apply to an action by the United States to set aside a fraudulent transfer.
The advantages of using IRC § 6901 procedures are:
Following the assessment, the IRS may use all administrative collection procedures and may file lien notices against the transferee or fiduciary. The federal tax lien attaches to all the property of the transferee or fiduciary.
Use of IRC § 6901 procedures is consistent with the general preference for resorting to administrative collection before judicial collection.
The advantages of a district court suit are:
The limitations period for bringing suit to assert transferee or fiduciary liability is generally longer than the limitations period for administratively asserting transferee liability.
Transferee liability can be asserted for any type of tax. The IRC § 6901(a) limitations do not apply.
In one action, the government may reduce a liability to judgment, establish transferee or fiduciary liability (or, alternatively, set aside a fraudulent transfer) and foreclose a lien. If the court orders a sale, it will be able to give clear title, thereby increasing what a purchaser is willing to pay over what a purchaser would pay at an administrative sale of seized property.
If the property has increased in value, a suit to set aside a fraudulent transfer allows for recovery of the increased value of the property.
If the property has decreased in value, both the IRC § 6901 procedure and a suit to impose transferee liability are preferable to a suit to set a aside a fraudulent transfer.
Many state corporate merger and consolidation statutes provide that a surviving corporation is liable for the debts of a predecessor corporation when the surviving corporation is the result of a formal merger or consolidation of two corporations. In these cases, the surviving corporation is primarily liable for the tax debts of the predecessor corporation as a successor in interest. The successor in interest becomes the taxpayer and is primarily liable for the predecessor’s tax liability. Oswego Falls Corp. v. Commissioner, 26 B.T.A. 60 (1932).
The government should generally handle successor liability cases by asserting primary liability against the successor. The government may also seek to hold the successor liable as transferee under the IRC § 6901 procedures. See Southern Pacific Transportation Company v. Commissioner, 84 T.C. 367 (1985). See also IRM 22.214.171.124.2, Assessing Liability Under IRC § 6901.
A number of courts have held that a successor corporation cannot be primarily liable and liable as a transferee based on the same legal theory. See, e.g., Commissioner v. Oswego Falls Corp., 71 F.2d 673, 676 (2d Cir. 1934). Although the Service does not agree with this holding, it is advisable to identify a separate legal basis for liability of the successor as transferee before resorting to the IRC § 6901 procedures. Consult Area Counsel before recommending the pursuit of an assessment against the successor under IRC § 6901.
Like nominee or alter ego scenarios, a taxpayer’s liability may be collected from the successor in interest using administrative collection procedures. This is assuming that a valid assessment exists against the original corporate taxpayer because the successor corporation steps into the shoes of the transferor corporation. Although the government may rely on foreclosure of the secret lien against the successor, a new notice of federal tax lien against the successor naming the successor corporation (corporation X, as successor to taxpayer A) should be filed to preserve the government’s priority over other creditors.
Successor liability may also be established in federal district court pursuant to IRC § 7402(a) and 28 USC §§ 1340 and 1345. The ten-year statute of limitations under IRC § 6502 for the original corporation’s tax liability applies to collect from the successor corporation.
If it appears that successor liability may apply, consult Area Counsel for approval before taking any collection action against the successor corporation.
A tax liability may be collected from the taxpayer’s property held by a nominee.
In a nominee situation, the taxpayer places the taxpayer’s assets(s) in the name of another person or entity, but control of the asset(s) and other incidents of ownership remain with the taxpayer. The transfer is “in name only.” In other words, in a nominee situation, a separate person or entity, such as a trust, holds specific property for the exclusive use and enjoyment of the taxpayer.
Generally, specific property being held by the nominee must be identified and listed on a notice of federal tax lien filed against the nominee.
The nominee theory focuses on the relationship between the taxpayer and the transferred property. See IRM 126.96.36.199.7.2 for factors used to show the presence of a nominee situation.
If it is determined that a nominee situation may exist, consult Area Counsel before instituting administrative collection action against the nominee.
A tax liability may also be collected from the taxpayer’s alter ego.
In an alter ego situation, the taxpayer usually establishes an entity (often a corporation) and transfers assets to it, but there is such a unity of ownership and interest between the taxpayer and the entity such that the entity is not considered a genuine separate entity. In other words, an alter ego is an entity that is legally distinct from the taxpayer, but is so intermixed with the taxpayer that their affairs (and assets) are not readily separable. As a result, the entity should be considered the same as the taxpayer for collection purposes.
All of the assets owned by the alter ego may be used as a source from which to collect the taxpayer’s tax liability.
The alter ego theory focuses on the relationship between the taxpayer and alleged alter ego entity. See IRM 188.8.131.52.7.1 for factors used to show the presence of an alter ego.
If it is determined that an alter ego may exist, consult Area Counsel before instituting administrative collection against the alter ego.
Nominee and alter ego situations are distinguishable from transfers for which transferee liability may be asserted, including fraudulent transfers. Although they often share common facts and one case can involve both concepts, nominee and alter ego situations are different from fraudulent transfers in the following respects:
Transfer of Legal Title Not Required. A transfer of legal title is not necessary to prove a nominee or alter ego relationship exists. Holman v. United States, 505 F.3d 1060, 1064-65 (10th Cir. 2007) (nominee lien against property purchased by nominee with money from the taxpayer is permissible). Nominee or alter ego theories can be used when there has been an indirect transfer by the taxpayer or when there are problems proving a fraudulent transfer occurred. For example, the taxpayer was not insolvent at the time of the transfer or was not rendered insolvent by the transfer, or a transfer may have occurred well before the tax liability accrued. Insolvency or the accrual of taxes near the date of transfer must be shown to prove a transfer was fraudulent.
Simulated Transfer Versus Actual Transfer.
i) If a transfer has occurred, the nominee and alter ego situations are based on simulated transfers. Often, the simulated transfer may be to a fictitious entity owned and controlled by the taxpayer. See United States v. Klimek, 952 F. Supp. 1100 (E.D. Pa. 1997). The simulated transfer is not intended to divest the transferor of any rights to the property.
Example: In the nominee scenario, there may be a transfer to a third party while the taxpayer actually retains the benefit and use of the property or with the understanding that the property will be returned to the transferor after the transferor’s creditors lose interest in collecting their claims.
Example: In the alter ego scenario, the taxpayer may transfer property to an entity owned and controlled by the taxpayer to shield assets from creditors.
ii) In most situations in which transferee liability may be asserted, including fraudulent transfers, the parties intend to effect an actual transfer of property or an interest in property. Between the transferor and the transferee, the transfer is valid under contract law. In contrast to the nominee or alter ego situation, transferee liability is generally only asserted when the taxpayer has transferred both legal title and control over the property to the transferee.
A taxpayer’s liability can be collected from the taxpayer’s property held by a nominee or alter ego using administrative collection procedures.The purported transfer is ignored and the IRS can rely on an assessment made against the taxpayer and a lien filed in the name of the taxpayer. To protect the priority of the assessment lien against the liens and security interests of third parties, a notice of federal tax lien based on the assessment against the taxpayer should be filed in the name of the nominee or alter ego (as taxpayer's nominee/alter ego), and property seized or levied by a nominee or alter ego levy. Area Counsel approval is required to issue an alter ego or nominee lien or levy. See IRM 184.108.40.206.5, Approval of Alter-Ego and Nominee Notices of Levy; IRM 220.127.116.11.4.1, Preparing Special Condition NFTLs (Nominee, Alter-Ego, and Transferee); IRM 18.104.22.168.5, Preparing Nominee Liens; and IRM 22.214.171.124.7, Alter-Ego Liens.
Field Collection should always work to fully develop the factual background of each particular case, but it may not be possible to develop sufficient facts to establish which theory best fits the case, or the available facts may suggest the application of more than one theory. In these cases, the Service may take the position that a taxpayer has transferred the property to a third party by means of a fraudulent transfer or, alternatively, that the taxpayer's property is held by a nominee or alter ego. Area Counsel is also available to assist in determining which legal theories apply given the specific facts of the case.
A suit in federal district court pursuant to IRC §§ 7402(a) and 7403 and 28 USC §§ 1340 and 1345 may be advisable under some circumstances as an alternative to levy/seizure to establish that the property is held by the taxpayer’s nominee or that the legally separate entity is an alter ego of the taxpayer.
For example, a suit is advisable if the Service would like to maximize the sale of nominee or alter ego property, because a court will be able to give clear title to the property and potential buyers will pay more than if the property is seized and sold.
Similarly, if the property is encumbered and there is likely to be a dispute about the priority of lien or security interests, a suit would probably be the most prudent approach.
If the property to be collected from is a principal residence, a suit should be filed because judicial approval of the seizure of the residence would be required under IRC § 6334.
A suit may be in order if the expiration of the collection statute of limitations is near.
If there is some uncertainty about whether there was a fraudulent transfer or a nominee situation, a suit should be filed.
The ten-year statute of limitations under IRC § 6502 for collecting the taxpayer’s liability applies to collect from nominees and alter egos, whether by levy or suit.